Dilapidations and VAT

A landlord’s claim against its tenant for failure to comply with covenants to repair is, generally speaking, a claim in damages. VAT, being a tax on goods and services, did not apply. It was only if the landlord itself did the works the tenant had failed to do that the question of VAT arose and even then was not always applicable.

However, following decisions of the European Court, the UK Revenue and Customs, in its briefing paper 12 (2020), decalred that early termination fees and compensation payments were to be subject to VAT even if the payments were described as ‘damages’. The briefing paper was so widely drawn that it would cover a payment made by a tenant to its landlord at the end of its lease for dilapidations. Worse – the VAT payment would be due retrospectively. Uproar arose and the Revenue, having taken Counsel’s advice, stated the payment of VAT would only be due from some future date (i.e. there would be no retrospective payments due). That future date was originally to be 1 February 2021 but this is now subject to Revenue confirmation which is awaited.

The Revenue has stated it will issue revised guidance for businesses and a new brief will be issued in due course. In the meantime, landlords claiming damages for dilapidations will need to consider whether to raise the issue of VAT with its defaulting tenants and many landlords are now reserving the right, in any settlement agreement, to claim VAT on the amount of damages agreed with its tenant if the Revenue gives a backdated date for payment.

Claims for damages for dilapidations have always been contentious and this additional payment can only add to the aggravation between landlords and tenants.

We will continue to look for any implementation date issued by Revenue and Customs so watch this space!

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